Thornton Estates Limited v Cavell Leitch Pringle & Boyle HC Christchurch CIV 2005-409-1452
[2007] NZHC 2048
•24 August 2007
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2005-409-001452
BETWEEN THORNTON ESTATES LIMITED Plaintiff
ANDCAVELL LEITCH PRINGLE & BOYLE Defendant
Hearing: 28-29 May 2007
Appearances: R Osborne/G D Jones for Plaintiff
C Walker for Defendant
Judgment: 24 August 2007 at 11.00 a.m.
JUDGMENT OF VENNING J
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Solicitors: Lane Neave, Christchurch
Gilbert Walker, Auckland
THORNTON ESTATES LIMITED V CAVELL LEITCH PRINGLE & BOYLE HC CHCH CIV 2005-409-
001452 24 August 2007
A storm destroys the Lyttelton Marina
[1] On 12 October 2000, a severe southerly storm destroyed a substantial part of the floating marina at Magazine Bay, Lyttelton. Prior to the storm Thornton Estates Limited had agreed to purchase the marina from Lyttelton Marina Limited. Thornton had confirmed the marina contract as unconditional but settlement had not taken place by the date the storm struck.
[2] Thornton refused to settle the purchase of the marina. Lyttelton Marina (then in receivership) sued Thornton to specifically enforce the marina contract.
[3] Cavell Leitch Pringle and Boyle had drafted the marina contract for Thornton. Cavell Leitch continued to act for Thornton. Cavell Leitch also instructed senior counsel to act on Thornton’s behalf. Senior counsel recommended Thornton settle with Lyttelton Marina. The proceedings were ultimately resolved at mediation. Thornton agreed to pay $1.1 million plus interest to settle.
[4] Thornton sues to recover the $1.1 million plus interest which it says it had to pay because of Cavell Leitch’s breaches of duty in drafting the marina contract and advising it in relation to the marina contract.
The issues
[5] The issues in this case are:
a) What was the nature of the duty Cavell Leitch owed Thornton in relation to the passing of risk?
b) Was Cavell Leitch in breach of that duty?
c) Did Cavell Leitch cause the loss Thornton sues for?
d) Was Cavell Leitch in breach of the fiduciary duty it owed Thornton?
e) Is Cavell Leitch estopped from defending Thornton’s claim?
What was the nature of the duty Cavell Leitch owed Thornton in relation to the passing of risk?
[6] Lyttelton Marina and Thornton could not agree on who bore the risk of the damage the marina sustained in the storm. That dispute led to the earlier proceedings that Thornton settled by paying $1.1 million plus interest. In these proceedings, Thornton says it relied on Cavell Leitch to provide for risk in the marina contract and to properly advise it about the risk.
[7] The duty Thornton alleges arises from the relationship between Thornton and Cavell Leitch. Thornton, through its directors Messrs Sisson and Lyall, had a close relationship with Cavell Leitch. Cavell Leitch and Mr Keegan in particular had acted for Thornton in a number of property developments since the 1970’s. When Thornton became interested in making a formal bid for Lyttelton Marina in late July, early August 2000, it sought advice from Mr Keegan on the purchase. At the time the marina was still under construction, although it was substantially completed.
[8] Over the weekend of 12 and 13 August 2000 Mr Keegan completed a proposal on behalf of Thornton to purchase the assets and liabilities of the marina. The assets of the marina included the breakwater, berth, construction and materials; the resource consents; plant and equipment; leases and licences and the name “Lyttelton Marina”. The liabilities included a debt to the Banks Peninsula District Council (in excess of $2.6 million), a loan from the Bank of New Zealand (approximately $500,000) and over $550,000 due to Saltwater Marinas (NZ) Limited. Saltwater had a contract for the construction of the fixed and floating breakwaters, berths and infrastructure of the marina.
[9] Cavell Leitch accept that, in general terms, they owed a duty to act with reasonable care and skill when acting for Thornton in relation to the purchase of the marina.
[10] But Mr Walker submitted that Cavell Leitch was not in breach of any duty in relation to the passing of risk as alleged by Thornton. He submitted that Thornton did not plead Cavell Leitch was obliged to draft the marina contract so that risk passed at settlement. Mr Walker is correct, there is no pleading to that effect. But that does not answer the real issue which is, what was the nature of the duty in relation to the passing of risk? The precise nature of the duty Cavell Leitch owed Thornton in relation to the marina contract is to be determined not only by Thornton’s express instructions concerning the marina contract but also by the particular circumstances of the case: Gilbert v Shanahan [1998] 3 NZLR 528, 537; Pickersgill v Riley [2004] UKPC 14. The duty extends to matters which fairly and reasonably might have arisen in the course of carrying out those instructions. The passing of risk is a matter which arose in the course of carrying out the instructions.
[11] Cavell Leitch’s brief as solicitors to Thornton on the purchase of the marina and in drafting the marina contract was to draft the marina contract and advise on legal issues relating to the purchase of the marina. The passing of risk in the subject matter of the contract was such a legal issue. Within the scope of their brief, Cavell Leitch owed a duty to ensure the marina contract dealt with the legal issues that arose in the particular circumstances of the purchase of the marina. The duty also extended to advising Thornton on matters that Cavell Leitch should have been specifically aware of, including the issue of risk. While a solicitor does not have a general duty to advise on the commercial wisdom of a transaction, he or she does have a duty to advise on the potential legal pitfalls of a transaction: Pickersgill v Riley [2004] UKPC 14; Clark Boyce v Mouat [1994] 1 AC 428.
[12] Thornton called Mr North, a solicitor experienced in commercial and property matters, to give evidence as to what could be expected of a reasonable commercial solicitor in the circumstances of this case. Mr North confirmed that in his opinion a reasonably prudent commercial solicitor would turn his or her mind to the issue of the passing of risk in the subject matter of the contract between the time of execution and settlement. In his opinion risk was one of the matters which a solicitor involved in advising a client on a transaction needs to consider. Given the unusual nature of the subject matter of the agreement in issue in this case, and bearing in mind that Thornton was to assume the debts and obligations of Lyttelton
Marina, in Mr North’s opinion the issue of risk was of even more relevance and concern than might otherwise have been the case. Mr North remained unshaken in his evidence when challenged in cross-examination. The theme of Mr Walker’s cross-examination was that if general principles of common law applied to cover the position, there would be no need for the solicitor to expressly refer to risk in the contract. But Mr North remained of the opinion that no reasonably competent solicitor would fail to make express provision for the passing of risk and that if, for any reason, the contract did not provide for it then it would be absolutely essential the client understood what the impact of the omission was. In theory, Mr Walker’s proposition may be sound. Particularly in a straightforward case, the drafter may not be required to incorporate express provisions if the application of established common law principles would achieve the required result. But the marina contract was anything but straightforward and as Mr North’s evidence confirmed, the matter of transfer of risk was so important in the context of the contract, any reasonably competent solicitor would have expressly provided for it. I accept Mr North’s evidence.
[13] On the first issue I find that Cavell Leitch owed Thornton a duty in drafting the marina contract to expressly provide for the passing of risk and a further duty to advise Thornton about the issue of risk.
Was Cavell Leitch in breach of the duty it owed Thornton in relation to risk?
[14] The marina contract was drafted as a one-off agreement. The final version of the marina contract was prepared by a staff solicitor, Ms Henry, in Mr Keegan’s absence. Ms Henry did not expressly provide for the passing of risk in the agreement. She did, however, include a clause dealing with the passing of title and property. Clause 8 of the agreement read as follows:
8. Passing of title
Subject to the completion of settlement obligations due on Settlement Date, property in the Assets and responsibility for the Liabilities shall pass to the Purchaser on the Settlement Date and the Purchaser shall become the owner of the Business and entitled to carry on the Business from that date. The Purchaser must pay, satisfy, discharge and fulfil all costs, claims, expenses, liabilities,
obligations and undertakings arising in relation to the Business and incurred after Settlement Date (in addition to any liabilities assumed for the period prior to that date). The Purchaser hereby indemnifies the Vendor against any claim, action, proceeding, demand, damage, expenses or liability arising out of or connected with any breach by the Purchaser of this Agreement.
[15] Thornton says that Cavell Leitch was in breach of the duty in the following ways:
• by failing to advert to the question of when risk passed;
• by failing to expressly provide for the transfer of risk;
• by failing to advise Thornton properly or at all in relation to the transfer of risk. [16] Mr Walker noted that there had been no evidence from Thornton that Ms
Henry had not adverted to the issue of risk and submitted that whether Ms Henry adverted to the issue of risk or not was largely irrelevant if the marina contract provided for risk to pass. I accept Mr Walker’s submission to the extent that the thrust of Thornton’s case is that Cavell Leitch failed to adequately provide for the passing of risk in the contract and to advise on it. There is little point in engaging in consideration of whether Ms Henry failed to advert (in the sense of turning her attention) to the issue of risk. The question is whether Ms Henry, and through her Cavell Leitch, expressly provided for the transfer of risk in the marina contract.
[17] While the marina contract in general and clause 8 in particular does not expressly refer to the transfer of risk, clause 8 provides for property in the assets to pass on settlement date. Mr Walker submitted that Cavell Leitch provided for the transfer of risk by drafting a contract under which Lyttelton Marina effectively bore any accidental loss to the assets before settlement. He submitted that when clause 8 was considered in the context of the contract as a whole, and established common law principles about risk passing with property were applied to it, then Cavell Leitch had achieved the result desired from Thornton’s point of view, namely that Lyttelton Marina bore any accidental loss to the marina assets before settlement.
[18] The difficulty with that submission is, however, that given the different nature of the various assets and liabilities that made up the subject matter of the marina contract, different common law rules applied so that potentially risk passed at different times in relation to the separate assets that Thornton had agreed to buy. If the marina breakwater and berths can properly be classed as personal property then the effect of clause 8 and the operation of common law is that risk in them would not have passed by the date of the storm. But the assets being transferred also included leasehold interests (including improvements) in land which would not be personal property, and in which risk would have passed prior to the storm. If the intention was that risk was to pass in all the assets to be purchased at settlement, clause 8 and the contract would not have achieved that. Further, and importantly, it is by no means certain the breakwater and berths would be classified as personal property. Senior counsel expressed doubt over that issue.
[19] As Mr North’s evidence confirmed, the difficulties that faced Thornton after the storm would have been avoided if Cavell Leitch had made express provision for the transfer of risk. Mr North expected that a prudent commercial solicitor would make express provision for the passing of risk, in particular the point in time at which risk was to pass and assuming that was possession/settlement, then provision to cover the situation in the event of any loss, damage or destruction of some or all the assets, the subject of the agreement, prior to possession/settlement. Given the subject matter of the contract, the standard agreements for sale and purchase of land and/or business were not directly applicable. However, as Mr North said, both standard form agreements contain clauses dealing with risk, and the consequences of the destruction or damage of the subject matter prior to settlement, which could have been adopted and incorporated in the marina contract without difficulty by a reasonably competent solicitor. Cavell Leitch did not include such a provision in the marina contract. By failing to incorporate such a provision Cavell Leitch were in breach of their duty to Thornton to expressly provide for the transfer of risk. In the particular circumstances of this case it was not sufficient for Cavell Leitch to have included clause 8 in the general provisions of the agreement, and then to rely on the application of common law principles to provide for risk, particularly given the different and distinctive nature of the assets that formed the subject matter of the contract.
[20] Mr Walker also submitted that to the extent the contract, and clause 8 in particular, was ambiguous, Cavell Leitch had no duty to draft an unambiguous agreement, relying on the authority of Virgin Management Limited & Anor v De Morgan Group plc & Anor [1996] NPC 8.
[21] I am unable to accept that the Virgin Management case is an answer to Thornton’s claim against Cavell Leitch. The facts of the case are relevant to its application. Virgin entered a sale and development agreement with Conchita. An issue arose whether the agreement included capitalisation of the base rent for part of the premises. Virgin settled its dispute with Conchita by entering a later agreement but without choosing to argue the interpretation of the clause or to seek rectification. Virgin then sued De Morgan (surveyors) and Finers (solicitors) in negligence claiming damages representing the loss of payments Virgin would have earned if the agreement had included the disputed capitalisation. De Morgan and Finers argued that on its proper construction the agreement included the disputed capitalisation, and that Virgin should have sought rectification. During the trial Virgin sought to amend its pleadings to include a further cause of action that even if, on its proper construction, the agreement did provide for the disputed capitalisation, it was nevertheless negligently drafted so as to be unclear and difficult to construe.
[22] On that last aspect the Court of Appeal noted the difficulty of determining what duty rests upon solicitors to draft unambiguous agreements proof against contrary argument. Lord Justice Leggatt said:
In the first place is the difficulty of determining quite what duty rests upon solicitors (not to mention surveyors) to draft unambiguous agreements, agreements proof against contrary argument. Clearly, as Mr Hunt accepts, they cannot be required to forestall irrational argument; they must, however, he submits, protect their client against any risk of attracting rational argument – whatever precisely that may mean. That in our experience constitutes a novel and problematic touchstone of professional negligence which ought not to receive a ready welcome. Ordinarily a draftsman charged with achieving a given result may expect, if it is disputed, to be found right or wrong, whether upon a construction summons or otherwise. If he is found right, his client succeeds; if not, the draftsman is likely to be held liable to his client in negligence. It would alarm many to suppose that draftsmen, even though shown to have achieved what they set out to achieve, are nevertheless liable in negligence once “rational argument” is advanced against the (ex hypothesi) true construction of their document, reduced from that point on to the mere hope that damages will be mitigated by an eventual vindication of their draft.
[23] On the authority of Virgin Management, Mr Walker submitted that Cavell Leitch did not owe a duty to Thornton to draft an unambiguous agreement. But that is not the basis of Thornton’s claim against Cavell Leitch. Mr Walker’s submission does not respond to Thornton’s claim that Cavell Leitch had a duty to expressly provide for the transfer of risk and was negligent in not doing so.
[24] Mr Walker submitted that, properly analysed, clause 8 and the other provisions of the marina contract provided for the passing of risk on settlement and that Thornton should not have settled at mediation. He invited this Court to consider the arguments for and against that issue to determine whether in fact clause 8 and the other provisions of the contract provided that outcome. Mr Osborne submitted it was not this Court’s role to engage in such an analysis at this stage as that was not the issue in this case.
[25] I agree with Mr Osborne. Thornton does not allege that Cavell Leitch drafted an ambiguous agreement, but rather, given the subject matter of the marina contract, a reasonable solicitor would have included a clause that expressly provided for the transfer of risk in the various assets and liabilities forming the subject nature of the contract (and the consequences of destruction or damage of them prior to settlement) instead of leaving the matter to be covered by the application of the general common law principles in conjunction with clause 8 and the general provisions of the agreement. Mr North’s evidence was that the contract was inadequate in its failure to deal with risk. All that would have been required was a provision similar in substance to those in the standard form real estate and business agreements referred to. Clause 8, whatever its effect, was not such a clause. The contract drafted by Cavell Leitch does not expressly provide for the transfer of risk and the consequences of destruction or damage to the subject matter.
[26] The difference is between an ambiguous agreement (as in Virgin Management) and an agreement that does not contain a standard clause that any reasonably competent solicitor would have included, as in this case. The conclusion in the Virgin Management case can be contrasted with the decision in VCP Homes Inc v Fast 2002 BC SC 446. VCP Homes sued its solicitor, Ms Fast. Ms Fast had prepared a joint venture agreement for VCP and Herti. The joint venturers fell out.
A dispute arose between them as to the funding that VCP was obliged to put into the venture. The dispute arose out of the interpretation of a provision in the joint venture agreement drafted by Ms Fast. The proceedings between Herti and VCP were settled by VCP making a payment. VCP then sued Ms Fast. Ralph J in the Supreme Court of British Columbia considered that the issue was not whether, in a general way, the agreement was negligently drafted but rather to succeed:
… the plaintiffs must point to the presence or absence of particular provisions which demonstrate a breach of the standard of care and which caused a loss to the plaintiffs.
[27] He concluded that:
… a reasonably prudent solicitor would not have left the clause on borrowing so open to misinterpretation, at least without clear and informed instructions from the client.
Ralph J upheld the plaintiff’s claim against the solicitor. The position in the present case is stronger from Thornton’s point of view. In this case the solicitors have failed to include a relatively standard clause to provide for the transfer of risk and the consequences of damage or destruction to assets prior to settlement.
[28] Thornton says Cavell Leitch was also in breach of their duty to advise it properly or at all in relation to the transfer of risk. Mr Walker submitted Cavell Leitch were not in breach of any duty to advise Thornton about risk because Cavell Leitch advised Thornton to have insurance in place from settlement.
[29] Mr Lyall accepted that in discussions with Mr Adams of Cavell Leitch, Thornton was told that insurance needed to be in place at settlement. But Mr Lyall said there was never a suggestion by Mr Adams of a need for insurance at confirmation or prior to settlement. That evidence is not disputed.
[30] Again, as Mr North said, if the marina contract was not going to expressly deal with risk, it was essential that the client understood the impact of that. There is no evidence that Cavell Leitch gave Thornton advice about risk, apart from ensuring that Thornton had insurance cover in place after settlement. There was no evidence for example, that Cavell Leitch discussed the issue of risk and the possibility of loss
or destruction of the marina assets prior to the storm. It also seems clear from a memo prepared by Cavell Leitch on 22 September 2000 to address outstanding issues that the firm contemplated that insurance might be transferred, which could only have been at settlement. Given that Cavell Leitch take the view that clause 8 was sufficient to pass risk at settlement, it is perhaps not surprising they failed to advise Thornton to carry insurance from confirmation or to discuss the issue of risk prior to settlement.
[31] I conclude that Cavell Leitch were in breach of their duty to make express provision for the passing of risk in the marina contract and were also in breach of their duty to advise Thornton in relation to the transfer of risk. Cavell Leitch were in breach of the duty they owed to Thornton.
Did Cavell Leitch cause the loss Thornton sues for?
[32] Mr Walker submitted that even if the Court considered there was a breach of duty Cavell Leitch cannot be said to have caused Thornton any loss. The submission is based on the proposition that properly construed, clause 8 achieved the passing of risk at settlement and that Thornton should not have settled but should rather have resisted Lyttelton Marina’s claim and insisted that the matter be determined by the Court. Mr Walker submitted that Cavell Leitch cannot be made to bear the consequences of Thornton’s decision to settle. He again referred to the Virgin Management case and said Thornton’s decision to settle was effectively a novus actus interveniens so that Cavell Leitch had not caused any loss to Thornton.
[33] As was noted by Henry J in Sew Hoy & Sons Ltd v Coopers & Lybrand [1996] 1 NZLR 392 causation in the legal sense has been the subject of much debate and comment. Henry J concluded:
… [W]hat must still be established by a plaintiff is that in a commonsense practical way the loss claimed was attributable to the breach of duty, and thus justifies the Court in imposing responsibility on the defendant for the loss
(p 403)
[34] In the same decision McKay J noted that:
whether damage and fault are sufficiently connected for liability is a question of fact and degree …
(p 399)
citing Cooke P in Fleming v Securities Commission [1995] 2 NZLR 514.
[35] Thomas J put it this way:
Ultimately, the question is whether this loss is sufficiently linked to the breach of the particular duty to merit recovery in all the circumstances. See McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39, per Cooke P at p 41.
(p 411)
[36] On the issue of novus actus interveniens reference can be made to the following passage from the judgment of Lord Reid in M’Kew v Holland & Hannen
& Cubitts (Scotland) Ltd 1970 SC (HL) 20 at 25:
… if the injured man acts unreasonably he cannot hold the defender liable for injury caused by his own unreasonable conduct. His unreasonable conduct is novus actus interveniens. The chain of causation has been broken and what follows must be regarded as caused by his own conduct and not by the defender’s fault or the disability caused by it.
The submission of novus actus interveniens raises the issue of whether Thornton acted reasonably in settling with Lyttelton Marina.
[37] In this case, the concept of causation is also linked with the duty on a plaintiff to mitigate. As Toulson J put it in Standard Chartered Bank v Pakistan National Shipping Corporation [1999] 1 Lloyd’s Rep 747, at 758:
The orthodox view is that the rule as to avoidable loss is merely an aspect of the fundamental principle of causation that a plaintiff can recover only in respect of damage caused by the defendant’s wrong. The rule is not that the plaintiff owes any obligation to the wrongdoer to mitigate his loss (despite the much repeated use of the phrase “duty to mitigate”), but that he cannot recover for a loss avoidable by reasonable action on his own part because, if he could reasonably have avoided it, it will not be regarded as caused by the wrongdoer.
[38] Ultimately then, the question of whether loss and fault are sufficiently connected for liability is a question of fact and degree. In this case that involves consideration of the related issue of whether Thornton acted reasonably in settling. Cavell Leitch say that Thornton would not have sustained the loss if, instead of settling with Lyttelton Marina it had taken the matter to a hearing. Could the loss have reasonably been avoided in that way, or was Thornton acting reasonably in settling with Lyttelton Marina?
[39] Following the storm Thornton took advice from Cavell Leitch. At Cavell Leitch’s suggestion Thornton also took the advice of senior counsel, Mr Davidson QC. Acting on that advice, Thornton declined to complete the marina contract when settlement was due on 31 October 2000. Lyttelton Marina then sued Thornton. Once engaged in the litigation, Thornton only had two options, either to maintain its defence of Lyttelton Marina’s claim or to settle it.
[40] Mr Davidson recommended settlement of the proceedings. He also suggested
Thornton obtain a second opinion. On 14 February 2002 he advised:
I consider that the claim should be settled, as there are real risks against which we can offer no guarantees. The claim is a very large one. I am told that Thornton will not finally be worth a judgment, but I am uncertain what would be available to the vendor if it was successful.
…
I do not think this matter should go to Court but it is heading that way. I believe your clients should take a further opinion, which is an entirely orthodox stance to adopt in such a significant matter, and should do so urgently.
[41] Mr Davidson reported further the next day following an interlocutory hearing. He advised that Lyttelton Marina was taking the view that as a matter of construction of the contract Thornton assumed the risk from the time of confirmation. Mr Davidson noted that the key point was the argument that in the circumstances of the contract the risk did pass so that failure to receive the assets on settlement was not fatal to Lyttelton Marina’s claim. He again recommended a second opinion.
[42] Mr Weston was instructed. Mr Weston also focused on the issue of the transfer of risk. He advised Thornton that it was arguable, but by no means certain, that the key marina assets, breakwater and berths, would amount to personal property and that risk in them had not passed to Thornton by 12 October 2000. Mr Weston concluded that the legal issues were by no means certain and that he firmly believed Thornton should explore settlement options. Subsequently Mr Weston recommended Thornton should settle at “anything up to a million dollars”.
[43] The parties went to mediation in November 2002. By that date the claim Thornton faced had increased to $5 million (including interest). Thornton was represented at the mediation by Mr Weston and Mr Paulsen, a litigation partner of Cavell Leitch. Thornton settled Lyttelton Marina’s claim after an all day mediation for the $1.1 million plus interest.
[44] The Court of Appeal have confirmed that in the context of a party settling a dispute by resolving or compromising litigation reasonableness must be judged in the circumstances as they appeared to the plaintiffs at the time: Hooker v Stewart CA33/89 30 June 1989. McGregor on Damages (17th ed 2003) also notes the general principle that the duty to mitigate does not require a claimant to take the risk of starting an uncertain litigation against a third party (at para 7-075). The principle must also apply to continuing to defend proceedings.
[45] Despite the above authorities, Mr Walker submitted, again relying on the authority of the Virgin Management case, that Thornton’s loss, the $1.1 million paid to Lyttelton Marina, could not be said to be a consequence of Cavell Leitch’s actions. He referred to the following passage from the case:
The other central difficulty attending the proposed new case is with regard to the loss said to flow from the ambiguity (or at any rate lack of clarity) in the SDA. As we know, Virgin in the upshot chose, having taken Counsel’s advice, to argue neither construction nor rectification in resolving their dispute with Conchita. But can that really be said to be a direct and reasonably foreseeable consequence of sloppy drafting?
[46] Mr Walker submitted that Thornton’s decision to settle with Cavell Leitch equally could not be said to be a direct and reasonably foreseeable consequence of Cavell Leitch’s breach.
[47] But again the nature of the breach is material to determination of the issue. In the Virgin Management case the Court of Appeal was considering the issue of an ambiguous contract. It had already rejected the submission that the defendants owed a duty to draft an unambiguous contract. For the reasons set out above the present case is distinguishable. The breach of duty here was the failure to expressly provide for the transfer of risk and the consequences of destruction or damage to the subject matter of the contract prior to settlement.
[48] The loss in this case was foreseeable. A reasonable solicitor would have foreseen that if they did not include a clause that expressly provided for the passing of risk and the consequences of the destruction of part of the subject matter then Thornton as purchaser would be likely to face the prospect of litigation by Lyttelton Marina if it refused to settle following such destruction. That is precisely what occurred. Lyttelton Marina sued Thornton. Thornton, on the advice of Cavell Leitch took advice from senior counsel, both of whom recommended settlement. The settlement that followed at the mediation was at a figure above, but not markedly so, the settlement figure recommended by senior counsel, Mr Weston. The settlement followed a realistic appraisal of Thornton’s position. During the mediation Thornton was represented by senior counsel and Mr Paulsen of Cavell Leitch. Thornton was faced with the prospect, if unsuccessful in its defence, of a judgment of approximately $5 million against them. The loss, and Cavell Leitch’s fault are sufficiently connected.
[49] In both Virgin Management and the later case of Walker v Medlicott & Son [1999] 1 WLR 727, it was significant that the Court of Appeal considered that rectification would have been available and by failing to sue for rectification the plaintiff had failed to mitigate. In Walker v Medlicott, Simon Brown LJ noted that the circumstances of that case were so special (being a claim in negligence for incorrectly drafting a will) they took it outside the general rule. Brown LJ however confirmed that the general rule was that while the plaintiff must act reasonably in mitigation of his loss, the standard of reasonableness required is not a high one.
[50] Other authorities support Thornton’s actions in this case. In Pilkington v
Wood [1953] 2 All ER 810 the plaintiff sued his solicitor. The solicitor had been
employed in connection with the purchase of a property. He failed to advise the plaintiff of a defect in title. When the plaintiff went to sell the property the purchaser declined to complete, relying on the defect in title. The plaintiff then sued the solicitor for damages in negligence. The solicitor contended that before suing him the plaintiff should have sought to recover damages against his vendor under the covenant for title implied under the Property Law Act. Harman J held that even if he were given an adequate indemnity against costs by the solicitor the plaintiff’s duty to mitigate damages did not go so far as to oblige him to embark on a difficult piece of litigation and therefore the plaintiff was not under a duty to bring an action against the vendor for breach of covenant.
[51] To similar effect is the decision of Treloar v Henderson & Ors [1968] NZLR
1085. In that case the solicitor had drafted an agreement for sale and purchase. He had apparently inserted the incorrect purchase price. The vendor client settled the transaction at the reduced price and sued the solicitor for the difference. Henry J held that the question whether the client ought to mitigate damages by entering into litigation to avoid the contract depended on whether in the circumstances of the particular case it was reasonable for him to do so.
[52] The position was confirmed in the decision of Warren & Mahoney and Wood
& Poole v Dynes CA49/88 26 October 1988, where the Court concluded that the issue is whether it could be said the claimants had acted unreasonably in failing to take steps to mitigate before suing their professional advisors, the architects and engineers.
[53] Finally, reference can be made to the decision of Dean v Allin & Watts [2001] 2 Lloyd’s Rep 249 where it was held that there was no failure to mitigate where the plaintiff decided to settle rather than carry on the defence of proceedings brought against it. The Court accepted the plaintiff would have been involved in complex and uncertain litigation in defending the claim brought by a third party. The Court noted that the law in issue was uncertain, the litigation would have been strenuously fought by the other parties and the plaintiff lacked the financial resources to conduct the litigation. In the circumstances it was not unreasonable for them to submit to the claim and then sue the solicitors.
[54] On the evidence in this case Thornton acted reasonably in settling with Lyttelton Marina. Lyttelton Marina had made it clear through the course of the proceedings that it was prepared to take the matter to a full hearing. At stake was
$5 million. Thornton could not readily afford that. There was no suggestion from Cavell Leitch that it would underwrite the defence of the proceedings. Cavell Leitch instructed senior counsel for Thornton, both of whom advised Thornton to settle. Cavell Leitch through Mr Paulsen attended the mediation and actively engaged in the settlement process. To that extent Cavell Leitch encouraged Thornton to settle. This was not a case where rectification was available. Clause 8 was never going to be rectified. The contract simply omitted to expressly provide for risk. Thornton acted reasonably in all the circumstances in settling.
[55] Mr Walker next submitted that in making the settlement, Thornton took into account a number of reasons other than the merits of Lyttelton Marina’s claim, which was unreasonable. Mr Sisson candidly accepted that he wanted certainty rather than taking the risk of litigation. He also acknowledged that he took into account the opportunity costs to Thornton’s business activities of the litigation and the distraction that it was causing him. Mr Sisson did not accept the proposition put to him that he was anxious to appease the Banks Peninsula District Council. The desire for certainty, the fear of a potential judgment for $5 million, and concern at the opportunity cost of the ongoing litigation were all reasonable considerations to take into account when making the decision to settle.
[56] In the circumstances of this case, Thornton was not obliged to continue to defend the claim by Lyttelton Marina. I conclude that Thornton’s loss was caused by Cavell Leitch’s breach of duty and that Thornton acted reasonably in setting the claim on counsel’s advice.
Was Cavell Leitch in breach of the fiduciary duty it owed Thornton?
[57] Cavell Leitch accepts that it owed a fiduciary duty to Thornton to act with absolute loyalty and good faith. It accepts that there was a potential conflict of interest because Thornton might make a claim against it for negligence (notwithstanding Cavell Leitch expected any such claim would fail).
[58] During the course of the proceedings between Lyttelton Marina and Thornton the issue of whether Cavell Leitch should continue to act for Thornton was raised. Cavell Leitch notified its insurers. On the advice of the solicitors appointed by its insurers Cavell Leitch required Thornton’s directors to obtain independent advice. Messrs Sissons and Lyall completed an acknowledgement of independent advice that confirmed:
4.… [Thornton has] been advised that there may possibly exist a conflict of interest between [Cavell Leitch] and themselves as a result of the fact that [Cavell Leitch] drafted the contract which is at issue in the proceedings.
5.The conflict arises because of a possibility that [Cavell Leitch] may favour its interests over the interests of [Thornton] when arguing the interpretation of the Agreement in the Court proceedings.
6.If the Court finds in favour of [Lyttelton Marina] in the current litigation, [Thornton] may have a potential claim for negligence against [Cavell Leitch] arising from its advice given to [Thornton] in relation to the drafting of the Agreement for Sale and Purchase of the marina.
7.[Thornton has] obtained independent legal advice from S J Shamy, Barrister & Solicitor, which clearly, fully and frankly sets out the matters above.
8.Despite the conflict of interest, [Thornton] wishes [Cavell Leitch] to continue to act as solicitors for them in the litigation.
[59] Thornton says that Cavell Leitch breached the fiduciary duty by encouraging it to settle without putting it on notice that Thornton may be precluded from pursuing indemnity from Cavell Leitch or that Cavell Leitch would argue Thornton could not succeed because it had settled rather than incurring a liability through judgment.
[60] Mr Osborne submitted that the acknowledgement of independent advice and confirmation by Thornton that Cavell Leitch could continue to act did not address the breach of fiduciary duty, as it did not extend to the situation which occurred, namely the settlement of the proceedings prior to hearing.
[61] Mr Walker accepted that Cavell Leitch went along with the advice of senior counsel to settle and in that sense “encouraged or permitted” Thornton to settle. He also accepted that Mr Keegan said to Mr Sisson words to the effect that if Cavell Leitch was at fault Cavell Leitch would “tidy it up”. But he submitted that Cavell
Leitch did not owe Thornton a duty to advise it that by settling its claim Thornton would be precluded from pursuing Cavell Leitch or to advise it that in the face of any such claim Cavell Leitch would argue the claim must fail because Thornton had settled rather than pursuing the matter to judgment. Mr Walker submitted there could be no breach of fiduciary duty because Cavell Leitch did not argue Thornton was precluded from bringing such a claim merely because it settled rather than obtaining a Court judgment. Rather, he said Cavell Leitch’s position was that it was not negligent, which would have been proved if the matter had been taken to a hearing.
[62] This issue is complicated by the terms of the acknowledgement. The purpose of the acknowledgement was to avoid the potential conflict inherent in Cavell Leitch continuing to act for Thornton. The acknowledgement of independent advice was directed at the situation of the proceedings going to fixture and the conflict that might arise during the course of the hearing. Conceptually it is difficult to see how a conflict could arise if the matter had proceeded to a full hearing. The interests of Thornton and Cavell Leitch would have coincided at such fixture. It was in the interests of both to have the position that Cavell Leitch asserted as the drafter of the contract and that Thornton asserted in the proceedings as justifying their not settling (namely that risk had not passed and they were not obliged to settle), affirmed. Unfortunately, the issue of settlement before hearing was not addressed in the acknowledgement of independent advice and waiver. But it was in relation to settlement that the potential for conflict particularly arose. Cavell Leitch’s wish (not communicated to Thornton) to have its position as drafter vindicated by taking the matter to a full hearing was in direct conflict with Thornton’s desire to settle to avoid the risk of an adverse judgment. In the circumstances, the acknowledgement of independent advice does not excuse Cavell Leitch from any breach of fiduciary duty in relation to its participation in the settlement.
[63] Underlying Cavell Leitch’s position in defence of Thornton’s claim is the proposition that the contract they drafted adequately provided for the transfer of risk. The only way that was going to be established, as Lyttelton Marina did not accept the position, was by the matter proceeding to a full hearing. But Cavell Leitch encouraged Thornton to settle rather than proceed to a hearing. Cavell Leitch owed
a fiduciary duty to Thornton to advise it, when encouraging the settlement as it did, that if Thornton settled without testing the legal position, then in any subsequent claim, Cavell Leitch would take the point that there was nothing wrong with its drafting and that if Thornton had taken the matter to a full hearing Cavell Leitch would have been vindicated.
[64] Mr Sisson has confirmed in his evidence that if he was aware a settlement could have precluded Thornton from seeking contribution from Cavell Leitch then they would have taken advice from senior counsel as to that very issue. He said they did not know it was an issue because Cavell Leitch did not raise it with them. Indeed, as noted, Mr Keegan had said that Cavell Leitch would “tidy it up”. Mr Sisson said that if they had been given advice on the consequences of settling and had been told that it might deprive them of the right to look to Cavell Leitch for indemnity he had no doubt they would have insisted on a way of preserving their rights against Cavell Leitch before attempting or concluding a settlement with Lyttelton Marina.
[65] It is no answer for Cavell Leitch to say, as Mr Walker has submitted, that Thornton was not precluded from bringing the claim merely because it settled. That is to state the position too narrowly. It is the nature of the defence that is the issue. Given that Cavell Leitch, through its litigation partner Mr Paulsen, actively participated in the settlement on behalf of Thornton and encouraged the settlement, Cavell Leitch should have made it clear to Thornton, before it settled with Lyttelton Marina that Cavell Leitch took the position there was nothing wrong with their drafting and they would raise that as a defence to any claim, because the only way that could be determined was by a ruling of the Court. The failure of Cavell Leitch to give that advice was a breach of the fiduciary duty owed to Thornton in the circumstances.
[66] Given that Thornton would not have settled had it been fully informed by Cavell Leitch of the grounds of defence that the firm might raise to any later claim, the loss caused by the breach of fiduciary duty is the settlement amount incurred.
Is Cavell Leitch estopped from defending Thornton’s claim?
[67] The elements required for an equitable estoppel were confirmed by the Court of Appeal in Burbery Mortgage Finance & Savings Ltd v Hindsbank Holdings Limited [1989] 1 NZLR 356. An equitable estoppel will apply whenever one party has, by words of conduct, made to the other a clear and unequivocal promise or assurance intended to affect the relations between them and to be acted on accordingly. The representation may be inferred from conduct.
[68] In this case Thornton says that by encouraging Thornton to settle, Cavell
Leitch is estopped from invoking against Thornton:
• any proposition to the effect that by reason of the circumstances in which Thornton came to settle it can no longer pursue Cavell Leitch for compensation on indemnity; or
• any legal proposition to the effect that Thornton has not acted reasonably incurring a settlement liability in the region of $1 million in mitigation of damage.
[69] Mr Walker submitted that Cavell Leitch does not seek to advance either proposition. He submitted that Thornton’s claim fails because Cavell Leitch was not negligent, not because the liability in issue was incurred by settlement rather than by way of judgment. He submits that Cavell Leitch does not say the plaintiff acted unreasonably in settling.
[70] In my judgment the first matter referred to by Thornton relates more directly to the breach of fiduciary duty. The second matter is, however, more relevant to the estoppel argument. Mr Walker’s submission in opposition fails to take sufficient account of the factual background to the settlement. It may be one thing for a firm of solicitors in Cavell Leitch’s position to stand back, allow the client to settle the third party’s claim and then to run a defence at trial they were not negligent according to the standards of the reasonably competent solicitor. It is quite a different proposition, however, for the solicitors to actively engage in the decision to settle,
and then to run a defence to a subsequent claim by the client on the basis that if the construction of the clause had been taken to a full hearing the Court would have upheld the clause as adequate. That is tantamount to saying the settlement was unreasonable.
[71] If Cavell Leitch was to take that position, as it now does, then that position needed to be made perfectly clear to Thornton. That position is inconsistent with Cavell Leitch continuing to act and actively encouraging the settlement of the third party proceedings. By encouraging the settlement and also saying that if they were wrong they would “tidy it up” the solicitors represented to Thornton that the reasonableness of such settlement would not be raised as a defence to any subsequent claim. Despite Mr Walker’s submission to the contrary, the effect of the defence run by Cavell Leitch in these proceedings is that Thornton should not have settled, or that the settlement was unreasonable because there was no need to settle as the drafting would have been upheld if tested.
[72] The defence submission is also dependent on the Court accepting that Cavell Leitch were not in breach of the duty owed to Thornton. I have already rejected that argument. If necessary, I would also have found Cavell Leitch was estopped from pursuing the defence that Thornton had not acted reasonably in incurring the settlement liability.
Conclusion
[73] Cavell Leitch owed Thornton a duty in drafting the marina contract to expressly provide for the passing of risk and to advise Thornton about the issue of risk.
[74] Cavell Leitch were in breach of that duty. Clause 8 and the balance of the marina contract did not expressly provide for risk. A reasonably competent solicitor would have provided expressly for risk rather than relying on clause 8 and the operation of common law. Cavell Leitch was also in breach of their duty to advise Thornton in relation to the transfer of risk.
[75] Thornton has suffered loss as a consequence of Cavell Leitch’s breach of duty in that Thornton was required to pay $1.1 million plus interest to settle the claim brought against it by Lyttelton Marina. Thornton acted reasonably in settling at that figure.
[76] In the alternative Cavell Leitch was in breach of the fiduciary duty it owed Thornton in encouraging it to settle with Lyttelton Marina without advising Thornton that if it did settle, Cavell Leitch would, in any subsequent proceedings take the position that if Thornton had not settled a Court would have held that risk did not pass until settlement.
[77] Finally, Cavell Leitch is estopped from now asserting that Thornton had not acted reasonably in settling with Lyttelton Marina.
Result
[78] Thornton is to have judgment against Cavell Leitch in the sum of
$1,147,985.64 together with interest on that sum calculated from the date of the last payment, namely 31 May 2004. The rate is not specified in the claim. It is to be at the rate in the Judicature Act 1908.
[79] Thornton is also to have costs against Cavell Leitch on a 2B basis together with disbursements as fixed by the Registrar. I certify for second counsel.
Venning J
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